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Japanese investors nurture domestic SRI market


Japan’s socially responsible investment (SRI) market has blossomed, helping the country to become a leading destination for the sector. Morgan Davis reports.

Green bonds have become an increasingly popular funding tool, as companies, banks and governments strive to battle climate change. They are now so ubiquitous that many people equate socially responsible investing with green bonds. But the environment is just one piece of the puzzle — and Japan proves how much room there is for social investing to grow.

Japan is a clear leader in social bonds. Chinese issuers, leaders in green bonds in the world, sold their first international social bond earlier this year, when Bank of China turned to investors in Hong Kong and Macau. Japanese issuers, in contrast, have been selling social bonds since 2016, according to Dealogic data. And they were keen buyers of themed bonds long before then.

Japanese investors like to approach investing through an environmental, social and governance (ESG) lens, a label that allows more flexibility than narrowly-focused green investing, says Koji Shimamoto, president of Société Générale Securities Japan. Issuers have followed suit. The Development Bank of Japan, for instance, has opted to use a sustainability label for some of its dollar bonds since 2016. Sustainability labels combine a social and green use of proceeds. 

Amid the Covid-19 pandemic, issuers are turning to social bonds to offset the impact of the virus, meaning a drop in green issuance but a new supply of social notes. More than $9bn of social bonds were issued in the three weeks ending on April 14. 

In Asia, the likes of the Republic of Indonesia, Bank of China and South Korea’s Kookmin Bank have sold Covid-19 response bonds. The use of proceeds for these notes fits perfectly under the UN’s Sustainable Development Goals, as they incorporate access to healthcare and related equipment, in addition to funding for SMEs, among other initiatives. Banks have liked to raise funds for SME-linked relief, which allows them to give loans at preferential rates, effectively creating jobs and supporting the economy.  

“If you think about where capital needs to get diverted under the pandemic… it has to do with the healthcare infrastructure, wellbeing, access to essential services and mitigating the social and economic fallout from the virus,” says London-based Jarek Olszowka, head of sustainable finance at Nomura. “You’re going to see two strands of social bonds, one for healthcare and supply chains for food security, and the other for providing economic support for vulnerable populations, for example through financing projects aiming at preventing unemployment or providing support to SMEs.”

Japanese borrowers are yet to sell a Covid-19 relief bond, but that may be because the country was slow to respond to the outbreak. It wasn’t until April 7 that prime minister Shinzo Abe declared a state of emergency in Tokyo and six other prefectures, which account for just less than half of Japan’s population. 

Follow the trend

Olszowka expects Japan to follow the trend of social and sustainability Covid-19 relief bonds, with public sector entities like Japan International Cooperation Agency (JICA) potentially opting to sell Covid-19 social bonds, as well as some of the largest banks and possibly some of the non-financial corporates. 

Japanese investors should like Covid-19 bonds. While there aren’t any true social-dedicated funds in the country, investors that focus on socially responsible investing like social bonds. Even mainstream investors, driven by the sense of emergency, should want to buy the bonds, says Olszowka. “Everyone is affected by Covid-19. Companies and individuals are eager to do their part to fight the virus,” he says.

Japanese investors already have a strong understanding of ESG. 

Dominique Duval, head of sustainable banking for Asia Pacific at Crédit Agricole in Hong Kong, says that Japan is the only market in Asia where she can split her time evenly speaking to issuers and investors, because Japan has a much more active ESG investor base than other countries in Asia. 


Her colleague, Ben Lamberg, global head of MTNs and private placements and head of credit syndicate trading and sales for Asia Pacific at the French bank, thinks Japan is leading the way. “Japanese institutional investors are really setting the tone for Asia,” he says, pointing out that the SRI investor base in the rest of Asia tends to be global asset managers and banks, rather than regional or domestic firms. 

“We need more Asia-based investors to follow Japan,” he adds. “Not just global shops deploying SRI policy to their Hong Kong, Singapore or Tokyo offices. We really need Asian-centric investors to get engaged.” 

The strength of the investor base has an obvious benefit: it makes it much easier to engage issuers when you can point to a clear source of demand. Japanese issuers have taken notice. This is true across the SRI bond market, although it still appears strongest in green bonds.

Orix, a Japanese financial services group, offers one example. The company sold its first yen-denominated green bond this year, raising the money to finance solar power generation projects. A source at the company said it opted for yen because, when it weighed up the demand among investors for green bonds, it saw that local investor knowledge had grown considerably.

“Although currently green investors in Japan are limited to only some health insurance companies, local banks, education institutions and so on, the [understanding] of ESG has certainly [improved],” says the source at Orix.

Bankers say that Japan’s acceptance of social responsibility is partly cultural. In Japan, individuals feel social and corporate responsibility is their problem as much, if not more so, than the government’s, says Shimamoto. That attitude has led some companies to embrace SRI initiatives as well because it can improve the appeal of their brand, he adds. 

“One of the key themes that brought the institutional investor base to the SRI market is the social element,” agrees Duval.  She sees the social benefits, encompassing everything from gender equality and education to SME financing and employment, as more prevalent in Japan that other parts of Asia.  

Japan’s Government Pension Investment Fund (GPIF), the largest retirement savings pool in the world, has been at the forefront of investor demand. “GPIF has come out with very strong statements in the last 18 months in support of the SRI market,” says Lamberg. 

GPIF requires all its asset managers to integrate ESG into investment analysis and decision making. In the first quarter of 2020, it announced initiatives with the Netherland’s BNG Bank, Sweden’s Kommuninvest, German development bank KfW and the Inter-American Development Bank to promote green, social and sustainability bonds. 

But while Japanese investors are eagerly adopting SRI principles, it is still early, says Masato Takebayashi, lead analyst for Asia Pacific research at Sustainalytics. “Japanese social bond investors are still learning,” he says. “Japanese green bond issuers were able to learn from the issuers in other advanced markets… but social issues are regional and culturally specific, and the definition of target population can vary depending on local contexts.” 

This is one of the reasons that finding a use of proceeds for social bonds can be more difficult than for a green bond, says Takebayashi. 

Steady growth is probably best for the market, he says. He points to a rising fear among green bond bankers: “green washing”, a term for deals that on the surface go towards funding projects that have some positive benefits for the environment but that, in practice, often fall short.

“A too rapid expansion of the ESG market without investors’ appropriate understanding on ESG can be a result of ‘green washing’,” he says.  


For some, the value of SRI bonds lies in the diversification that they offer. While the dollar remains the favourite foreign currency for Japanese companies, the euro market has also increasingly attracted borrowers as a diversification play. 

The euro market is an opportunity to test out new sustainable investing frameworks, says Naka Okuda, co-head of DCM, capital markets origination, Citigroup Global Markets Japan. This allows issuers to “do something good”, while attracting new investors, even if at a slightly less attractive price than a dollar bond, he says.

“Many companies are looking at ESG frameworks that could be a good trigger to tap the euro market for the first time,” says Okuda. “They believe the ESG framework is very popular with euro investors compared to dollar investors.” 

Likewise, Japanese investors seeking diversification are looking to the international bond market, and strongly considering SRI options, says Shimamoto. “Many investors need to diversify their investment products. The ESG and SRI products help not only in [supporting a company’s ethical] branding, but also with the diversification,” he says. 

While the social bond market plays a key role in the Japanese bond market, green bonds make up an even larger portion of the market. In 2019, $6.8bn worth of green bonds were sold by Japanese issuers, according to Dealogic. That’s up from $4.07bn in 2018, $2.3bn in 2017 and $596m in 2016, according to Dealogic. 

Sean Kidney, chief executive of the Climate Bonds Initiative, says that he is consistently meeting more investors to discuss green bonds, including insurers, pension funds and bank treasuries.  More people have become interested in green funding as climate change has come into the global spotlight. As an island nation, Japan deals with risks like typhoons head-on, something that costs lives, damages property and pummels the economy. Investors like insurance companies will face direct risks because of that, and are incentivised to look at green investments. 

Kidney expects more green bond issuance from utility companies this year. As a sector, Japan’s utilities are still figuring out how they can employ green bonds, but as many of the companies are adopting renewable energy as part of their wider business strategy, they will lean more towards raising green funds.  

The government may soon be a green issuer itself. “The Japanese government has a reasonably aggressive green economy strategy,” says Kidney. He expects that Japan will keep a close eye on Germany’s planned green bond sale, due out in the second half of 2020. He is cautiously optimistic that a successful deal from Germany could encourage Japan to follow suit. 

Despit the enthusiasm for SRI offers in Japan, the market is still small. Market participants agree that more education is still needed, and many investors are yet to understand the long term benefits of SRI. Issuers are also still figuring out what counts as a green or social use of proceeds, and what will be accepted by investors, especially outside Japan.

“There is lots of potential in Japan,” says Shimamoto. “Japanese culture respects the sustainability of the environment historically, and Japanese investors need to diversify.” 

That combination should be the perfect recipe for growth. “In the future, this market can be much bigger,” he says. 

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